Where to Keep Your Money When You're SavingYou’ve got your debt under control, you’re sticking to your budget and now you’re ready to start saving. However, you shouldn’t just keep your entire life savings in a checking account where most of it sits unused. By learning about different kinds of financial accounts and safe investment vehicles, you can make your excess money work for you by passively growing it with interest, while keeping cash you might need at the ready. In this article, we’re going to be looking at where you should keep your money, explaining each option according to its security, how quickly it grows and how easily it lets you access your savings. If you’re ready to learn about saving and investing, read on.

Money you need readily available

Available cash includes both money you need for your standard life expenses like food, utilities and rent, as well as any money you’ve built up for your emergency fund that you might need in a pinch. It’s important that this money is safe from market downturns and upheaval in the financial sector, so every account type in this category is insured by the FDIC for up to $250,000 per accountholder. It’s also essential for you to be able to access the money in this category easily, with growth being less important. Checking accounts are probably the best accounts to keep your money for easy access, as they generally offer unlimited transfers and withdrawals with a variety of methods like check writing and debit transactions. They’re good for day-to-day expenses, since they can handle money coming in and going out often.

For an emergency fund that you only dip into occasionally, it’s better to keep your money in a savings account, as they trade some accessibility for a bit of growth. Online savings accounts in particular are an attractive choice, as they usually offer annual yields of 1.5% or more, which are a good deal higher than the rates you’d find at many brick-and-mortar banks. The reason they aren’t great for your regular expenses is that many lack check-writing ability and debit card transactions, and all U.S. savings accounts have a federally-mandated withdrawal limit of six withdrawals per month, and going over that limit often means paying a fee or having your savings account automatically converted into checking. If you want a savings account that can send money by check or debit card, you could also look into a money market account. Money market accounts have annual yields similar to savings accounts (note that they’re usually a bit lower), along with many of the money transfer options available to checking accounts. However, like savings accounts they are also subject to the six-withdrawal limit, and many have high minimum deposits and balances required to keep the account open.

Money you’ll need soon

When you’re saving for something a few years off, such as a car or a big getaway, you don’t have to let that money sit in a savings account. There are a number of safe, short-term investments that will let you earn more interest than the vast majority of savings and money market accounts earn, and your money will be accessible by the date you need it. For instance, certificates of deposit, or CDs, often provide between 2% to 3% annual yield, and end at a fixed maturity date so you know when you’ll be able to collect your investment. Issued by banks in term lengths between three months and five years, CDs trade the accessibility of a bank account for a higher interest rate, though they’re insured by the FDIC so they’re just as safe. If you’re worried about tying up your money for a long time, you can make the money that you invest in CDs more available while only sacrificing a small bit of interest using a practice called CD laddering. In a CD ladder, you purchase CDs of different lengths so some mature earlier than others, giving you access to a portion of your total investment at staggered intervals. For example, instead of investing $3,000 into one three-year CD, you would invest $1,000 into a one-year CD, $1,000 into a two-year CD and $1,000 into a three-year CD. When a CD matures you can reinvest the gains, or if you have some unexpected expenses, you can just keep your money.

Another option in this category is to purchase bonds, which are issued by governments and non-bank companies. Like CDs, bonds have a fixed interest rate and maturity date, though they often have longer term lengths, and many pay out at least some of their yields as a fixed income. That means the bonds you invest in will pay you interest regularly, typically once or a few times per year, before paying you back your initial investment on the bond’s maturity date. One important thing to note is that bonds are not insured by the FDIC, and different sources of bonds can correspond to different levels of risk. For instance, Treasury bonds are issued directly by the federal government and are extremely safe places to keep your money, but they pay less interest than riskier corporate bonds that could become worthless if the issuing company folds. Different kinds of bonds also have different rules regarding taxes, such as municipal bonds, which are issued by state and local governments and earn interest that is exempt from federal taxes, making them good investments for people in high tax brackets.

Money you’re saving for the future

This is the money you’re saving for big, long-term goals, whether it’s retirement, buying a nice house or paying for your children’s education. When it comes to long-term investments, accessibility takes a back seat to security and growth, as ideally these are places where you’ll keep your money without touching it for many years. There is some risk involved with these investments, as most of them do involve putting your money in the stock market, but the stock market has generally provided good long-run returns over the past 80 years. Setting your money in a target date fund or index fund and leaving it alone can let you reap the benefits of the stock market while minimizing your risk.

To start, you’ll want to focus on filling up your tax-advantaged investment accounts, which let you shelter your savings from taxes. Many jobs offer 401(k) or 403(b) retirement plans, which both have an annual contribution limit of $18,500 (or $24,500 if you’re age 50 or older), and anyone receiving money from an employer, self-employment or as the result of a divorce decree can contribute to an IRA account, which has an annual contribution limit of $5,500 (or $6,500 if you’re age 50 or older). Retirement accounts come in both traditional and Roth varieties; traditional accounts let you deduct the money you stock away from your taxes the year you make the contribution, and Roth accounts pay out distributions that don’t count as taxable income. Before you invest in one of these accounts, be aware that they are called retirement accounts because you’re supposed to keep your money in them literally until you retire. In general, retirement accounts start paying distributions after age 59 1/2, and accessing the money in them early requires paying a stiff penalty fee.

For higher education funds, a 529 plan is what you want, as their interest earnings are not subject to federal tax and possibly state tax, depending on where you live. There are two kinds of 529 plans; savings plans that let you invest in various stock market funds that will earn you returns, and prepaid tuition plans which let you prepay for semesters at designated schools at the current market rate, saving you money if tuition increases. The downside of 529 plans is that they have very specific rules for what they can and cannot pay for, and if your child winds up not going to college until they’re over 30, then the plan is useless and you have to pay a penalty to withdraw the money from it. Prepaid tuition plans have additional restrictions, only applying the prepaid tuition to a handful of in-state schools, which limits your child’s choice of college.

If you’ve maxed out tax-advantaged accounts and you still have more money you want to save, it’s time to open an online brokerage account. If you’ve opened an IRA, you should be in familiar territory here. It’s basically the same thing, only you’re taxed on the growth of your investments and you don’t have to pay a penalty for taking your money out early.

If you’re overwhelmed at all of the different options you have for saving your money, an easy way to start is to just open up a high-yield savings account online and make a deposit. While your money starts earning some real interest, you can figure out which steps are the best to help you meet your monetary goals. To learn more about saving for the future and saving in the present, keep up with our personal finance blog.